Worldwide: Tax Trends: From Rates To Reporting - What To Expect In 2022

The post-pandemic tax world is dominated by changes in tax rules and tax reporting requirements adopted by governments in an attempt to augment tax revenues.

The most significant changes in rules that will shape the tax world in the next 5 years are:

1. The introduction of the global minimum tax rate

Initially, large companies—those with consolidated revenues above €750 million ($844 million) — will be asked to pay a minimum tax rate of 15% as of 2023. However, we can already see how this new rule impacts some of the countries where corporate income tax was not a concern until now. For example, UAE will introduce a 9% corporate income tax as of 1 June 2023 and will put an end to a long "no tax" period. We expect that other countries will follow and either increase the tax rates or change the taxation rules (eg one area that will require further consideration is if and how tax incentives can be used to lower the effective tax rate).

Regardless of when and what reactions will be triggered, companies operating cross-border will need to review their global operations to identify whether there will be an increase in their effective tax rate, to analyse the impact on the cash flows and to monitor the legal changes in the low-rate jurisdictions, changes that might impact their effective tax rate even if they do not fall into the large companies bucket by the OECD definition.

2. The spread of taxation on the digital economy

The trend is towards expanding the definition of services included in the digital tax scope. The consequence is that more businesses either need to pay the digital tax, or need to get registered in countries where they did not have such an obligation before and need to report more details around their transactions. Either way, the cost of doing business increases. There is a heavy burden on the shoulders of the companies operating in this field to keep up to date with the service definitions and to understand the digital permanent establishment rules. Mexico, Ukraine, Czech Republic are some of the countries that made changes in this area.

3. Wider BEPS adoption

The year has started with many base erosion and profit shifting (BEPS) activities. The OECD has published draft rules for nexus and revenue sourcing and has updated the Transfer Pricing guidelines. At country level, Costa Rica, Denmark, Peru have provided more clarity around the definition of Permanent Establishment (PE). Tax departments need to follow the changes and to continuously assess their PE implications and the need for registrations.

Increasingly complex tax reporting requirements

Tax authorities drive changes in the way in which they interact with taxpayers and the digitisation of tax filing. Digitisation could be as simple as using online portals to file the tax returns and as complex as having a real-time interface with tax authorities to report each and every transaction. The number of tax administrations that choose to require real time, or near real time, detailed transactional reporting increased from 40% in 2020 to 45% in 2021 and it continues to be an upward trend. Poland recently announced the introduction of e-invoicing in 2023. Romania is testing SAF-T reporting on large taxpayers in 2022 and plans to expand it in 2023.

Digital tax administration changes the way in which companies manage data, validate data and invest in technology. Digital tax administration speeds up tax digitisation at company level, but also requires data sources to be consolidated, tax rules to be well understood and configured in tax technology, and tax validations to be moved upstream because when data is submitted there is no point of return.

Anticipating the tax administration digital strategies is key to shape companies' data management and technology adoption strategies. The tax department should be one of the main stakeholders of internal digitisation and automation strategies because of the tax impact that such decisions could have.

Strict tax enforcement strategies

Tax enforcement has evolved in as a result of Covid-19, with tax authorities keen to ensure that tax rules are followed and tax revenues are collected. Tax enforcement has become more data driven, especially in those jurisdictions that have implemented digitalisation. Transactional data collected from taxpayers are used to assess which offer a risk and to plan the tax audits.

For example, in China tax authorities match the data sent by  taxpayers to the many different authorities such as State Welfare Administration and  Market Regulation. Using big data they perform ratio analysis to identify information that is contradictory compared to  other companies in each industry, with tax audits triggered by these data sweeps.

Spain recently announced its audit plan for 2022. Payments of dividends, interest and royalties to non-Spanish residents without a permanent establishment in Spain are designated in the Audit Plan as an "area of preferential attention, particularly in the case of large enterprises." The plan also indicates the use of technology to take advantage of the massive tax data provided by DAC6, CRS, FATCA or Country-by-Country reporting.

Another consideration is that tax administrations have lifted the reliefs allowed during pandemic. Extended filing deadlines and foregone penalties are not available any longer so companies need to ensure proper and timely compliance.

Companies need to closely monitor the accuracy of the reported tax data and data reconciliations becomes key. At the same time, companies should follow the changes in tax policies and should adapt their tax strategies to such changes to minimise the tax controversy risk.

Better cooperation mechanism

The pandemic has forced tax administrations to improve communication with taxpayers. While only 52% of tax administrations provided support on understanding tax rules and regulations in 2020, the percentage significantly increased in 2021.

Apart from this type of support, Netherlands, UK, Austria and US have implemented cooperative tax compliance programmes for large businesses.  Companies and tax administrations partner to improve tax control frameworks and manage the tax risks, helping tomanage the  challenges of applying different tax rules. The benefits include spending less time on tax audits, explaining tax positions and reducing tax controversies.

We estimate that cooperative tax programmes will expand, allowing taxpayers to work closely with tax authorities to correctly apply the tax provisions.

Understanding and taking advantage of the various support levels provided by tax authorities is key to efficiently managing the tax controversy risk.

In conclusion, an efficient tax risk management requires tax expertise, robust controls, valid data sources and in-depth knowledge of tax changes. Companies should address all these items in their tax policies and digital strategies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.